Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 5 - Dependent child age criterion
Outline of chapter
5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to standardise the age criteria for dependent children in respect of whom taxpayers may be eligible for certain tax concessions.
Context of amendments
5.2 Currently, the dependent child age criteria vary across entitlements, such that a taxpayer may be able to take a child into account when claiming the medical expenses offset, but not be able to take the same child into account when determining the family thresholds for the Medicare levy or the Medicare levy surcharge. A single set of age criteria will provide consistency and simplicity for taxpayers.
5.3 Prior to the introduction of this Bill the dependent child age test for the housekeeper, child-housekeeper, zone and overseas defence forces tax offset, as well as the Medicare levy and Medicare levy surcharge provisions was a child less than 16 years of age (not being a student) or a full-time student less than 25 years of age.
5.4 This differs from the dependent child age criteria for the medical expenses tax offset and the family tax benefit part A.
5.5 In the case of the medical expenses tax offset, a dependent child is:
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- a child of the taxpayer less than 21 years of age and
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- a child under 16 years of age (not being a student) or a full-time student under 25 years of age.
5.6 For the family tax benefit part A, a dependent child is:
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- an individual aged under 21 or
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- an individual who has turned 21 but is aged under 25 and is undertaking full-time study.
Summary of new law
5.7 The amendments will adjust the dependent child age criteria for the housekeeper, child-housekeeper, zone and overseas forces tax offsets, the notional dependent child tax offset and the notional sole parent tax offset and the Medicare levy and Medicare levy surcharge such that a dependant is a child less than 21 years of age (not being a student). The criteria for students will remain less than 25 years of age.
5.8 Standardising the age criteria for dependent children will allow more families to benefit from the dependant related tax offsets and the Medicare levy and the Medicare levy surcharge family thresholds.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| For the purposes of determining the housekeeper, child-housekeeper, zone and overseas defence forces tax offsets, notional dependent child and notional sole parent tax offset and the Medicare levy and Medicare levy surcharge provisions, the age criteria for a dependent child who is not a student is less than 21 years of age. | For the purposes of determining the housekeeper, child-housekeeper, zone and overseas defence forces tax offsets, notional dependent child and notional sole parent tax offset and the Medicare levy and Medicare levy surcharge provisions the age criteria for a dependent child who is not a student is less than 16 years of age. |
Detailed explanation of new law
5.9 The amendments will adjust the dependent child age criteria for the housekeeper, child-housekeeper, zone and overseas forces tax offsets and the Medicare levy and Medicare levy surcharge such that a dependent child is less than 21 years of age (not being a student).
5.10 Existing subsection 159J(2) provides a table of tax offsets setting out the categories of dependants and the amounts of tax offsets for each class. Class 3 provides that a child less than 16 years of age (not being a student) is a dependant. The amendment will omit '16' and substitute '21'. This will extend eligibility for the child-housekeeper, notional sole parent and notional dependent child tax offset, zone and overseas forces and medical expenses tax offsets. [Schedule 5, item 1, subsection 159J(2)]
Example 5.1
A taxpayer who resides in a zone A area in 2005-06 has three children aged 19, 15 and 13. The 19 year old child is not a full-time student but still resides with the taxpayer and has a separate net income of $1,010. The two children aged 15 and 13 both have a separate net income of less than $282.
Previously, the taxpayer was only able to claim an amount of zone tax offset with respect to the children aged 15 and 13, therefore the relevant tax offset amount would have been $376 for each child as they are both students that is, a total of $752. The family would calculate their total entitlement by summing their fixed amount for residing in zone A of $338 plus 50 per cent of the relevant tax offset amount (ie $376) resulting in a total zone tax offset of $714.
Under the new law the taxpayer would be able to claim an additional amount of zone tax offset in respect of the 19 year old child. The amount of the relevant tax offset the taxpayer can claim in respect of the 19 year old child is worked out as follows:
The amount by which the separate net income exceeds the notional tax offset:
$1,010 - $282 = $728
Dividing this amount by four and then subtracting from the notional tax offset for a first non-student child under 21:
$376 - $728/4 = $194
Under the new law the relevant tax offset amount would increase by $194 to a total of $946. Therefore, the family's total entitlement to the zone tax offset would be the sum of their fixed amount for residing in zone A of $338 plus 50 per cent of the relevant tax offset amount (ie $473), resulting in a total zone tax offset of $811.
Under the new law the family would increase their zone tax offset entitlement compared to the previous law by $97.
5.11 Existing paragraphs 159L(1)(a) and (b) provide that a taxpayer may be entitled to the housekeeper tax offset if a person is engaged in keeping house for a taxpayer and the person cared for a child of the taxpayer who is less than 16 years of age or a dependant included in class 3. The amendment will omit '16' and substitute '21' to extend eligibility to children of the taxpayer who are less than 21 years of age. [Schedule 5, item 2, paragraphs 159L(1)(a) and (b)]
Example 5.2
A person is fully engaged in keeping house for a taxpayer and cares for the taxpayer's child who is 17 years of age and is not a student. Previously the taxpayer would not receive the housekeeper tax offset, however under the new law the taxpayer would receive the housekeeper tax offset.
5.12 Existing subparagraphs 251R(3)(b)(ii) and (iii) provide that a child will be taken to be a dependant for the purposes of the Medicare levy and Medicare levy surcharge if the child is less than 16 or not less than 16 but less than 25 and receiving full time education. The amendment will omit '16' and substitute '21'. [Schedule 5, item 3, subparagraphs 251R(3)(b)(ii) and (iii)]
Example 5.3
A couple have two children, one aged 15 and an 18 year old who is no longer a student. Under the current law the couple's Medicare levy surcharge is calculated on the basis that the family has only one dependent child, thus resulting in a family threshold of $100,000. However, under the medical expenses tax offset, the couple would be able to claim medical expenses for both children. Under the new law the couple would be classified as having two dependent children for both the medical expenses tax offset and the Medicare levy surcharge. Therefore, the family's Medicare levy threshold would rise to $101,500.
Application and transitional provisions
5.13 The amendments apply from 1 July 2005.